Understanding Forex Signals for the Beginner

This article looks at different forex signals as used with trend following and trend confirmation tools.

In order to be an effective trader you must have a strong understanding of the forex market, forex trading and all the associated features. This knowledge can be gained by undergoing foreign exchange training. There are two types of analysis that must be learned through training, fundamental analysis and technical analysis. If you choose to use technical analysis as a trading base, then you must be aware of forex signals.

The trend following tools

The majority of traders adhere to the ‘following the crowd’ rules of trading as this is the simpler option; however, it is possible for one to make use of a counter-trend method and still experience profitable results. The use of trend following tools is important, but it should not be used as an independent system. Instead, it should be viewed as a suggestion or advice on which way to trade – long or short.

The trend confirming tools and forex signals

Trend following tools will indicate the direction of the trend, whether or not it is travelling up or down. However, to decide whether this information is accurate you should make use of a trend confirming tool. This trend confirming tool can be used to indicate selling and buying points, despite that not being its primary function.

When combining the use of both tools you will be able to note whether a market is bullish or bearish. This will help determine whether you should trade a long position (in a bull market) or sell your currency pair at a short position (in a bear market).

The moving averages

The moving average is a simple trend following tool that indicates the average closing price of a currency over a certain time period. For example, if you are viewing a 50 day to a 200 day average on one currency pair, then the favourable trend would be seen if the 50 day average is above the 200 day average. However, if the 50 day average falls below the 200 day average then it would be an unfavourable trend.

This tool is ideal if you want to identify large movements in the forex market, but you must remember that market movements are unpredictable and can turn irrespective of the moving average combinations being used. You should always determine which the best combination for particular time periods is. This will help in identifying whether you should be trading short or long.

The Moving Average Convergence Divergence tool

The Moving Average Convergence Divergence tool is one of the most popular and widely used trend confirmation tools. First, you must measure the difference between the two moving averages. This variance is then smoothed and followed by a contrast of its own moving average. If an increase in the smoothed average over its own average is detected, then is a positive and confirmation of an upwards trend. However, if the current trend is below the moving average, this is a negative result and a confirmation of a downward trend.